The sign that there is intelligent life on other planets is that they haven’t visited us! On one hand, I am absolutely thrilled to see the economy and our local market picking up. I am, however, worried about the global economy and the Fed policy. The first rule of holes is that when you find yourself in one you need to stop digging. This is to say that maybe the Fed should rethink the idea of giving forward guidance about interest rates. They are starting to lose credibility. The market is very smart and it recognizes that the combination of a strong dollar and punk economic data (here and especially abroad) trumps their desire to raise interest rates and start letting air out of the bubble that they created.
Speaking of holes, figurative and literal, the States water shortage is causing all of us issues. I know that I personally tore out my grass and put in a chipping and putting green. I save water and I have dropped two strokes off my game. I am seeing many building owners using drought tolerant landscape and rocks. I have found that the real savings is not just the water but a cut back on needs for landscape labor and repairs. The water crisis is a classic example of “the government solution”. Fifty percent of rain and snow melt is lost to the environment (because government has delayed building infrastructure to collect and distribute it), 40% goes to the farms (where 3/4’s of it is used to grow feed for cows and pigs) and 10% is used by the people. However, the 10% are expected to make up for the 100% – kinda like the tax system!
In our local market, the USD economic index rose for the 9th straight month. Help wanted advertising was the most robust gaining 2.38%. That would probably explain the drop in unemployment to 5.19% (down from 7.1% a year ago). Professional and business employment added 9900 jobs over the last 12 months, the largest gains. That would probably explain the sharp increase in home sales (3467 this much versus 3056 last month versus 2541 in February. It would also explain the slow uptick we are finally seeing in the office market. Hopefully, the trend gains traction over the coming years. More importantly the slow but steady recovery is leading to office rent increases in some markets and spaces. A case in point: a consulting firm that leased space in the Aventine (UTC) in mid-2012 for $2.85 psf was offered a “market rate” renewal of $4.25 psf! Now we are not seeing those rates or jumps in most of our markets but when those tenants face those rents, many will flow to the lower rates in suburban markets thereby dropping our vacancy and correspondingly raising our rents. We are also seeing the pre-leasing of new office developments with projected rents of $2.50 – $3.25 psf. These projects and rents also bode well for eventual rent increases for existing property owners.
Health and wellness programs in the workplace are the new sustainability. Insurance giant AON says investment in health and wellness programs return $3.0 to $6.00 for every dollar spent. Perhaps you should replace your common area with a putting green too – you can save water, increase productivity and rent!
The sharing economy is continuing to evolve. Many of you have used or heard of Airbnb or Uber, well this idea of sharing underutilized assets has spread to the restaurant business where multiple restaurants share a kitchen and serving area. Picture an Iron Chef meets Mall Food Courts. This concept allows a small business that couldn’t afford a brick-and-mortar location__ to take less risk, grow and keep profits healthier. So imagine your donut shop subleasing to a taco shop for lunch and a burger joint for dinner. The bad news is that Landlords will see more wear and tear and higher water costs. The good news is more traffic and the opportunity to raise rents and share in the success. This is the same kind of issue facing office owners and tenants as they densify the space because of the lack of paper and storage needs, putting a heavier load on the building and parking lot.
Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have economic growth is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debit spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debit has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is staring to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock.” And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the Eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a liquidity squeeze begins, it can create a lot of fear.
So what is the bottom line? Make hay while the sun shines! Expect the flow of credit to slow and have emergency funds (cash) available to survive and to take advantage of deals when they come up.
A Stimulus Story
It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.Suddenly, a rich American tourist comes to town.He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.
The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.
The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.
The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit.
The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.
And that, ladies and gentlemen, is how the Fed and IMF are solving the Greek Debt Crisis!